Nationale-Nederlanden Bank (NN Bank) is planning to issue soft bullet covered bonds off a new programme in place of conditional pass-throughs (CPTs), and a funding manager at the Dutch issuer told The CBR this is in anticipation of growing future funding needs.

NN Bank announced that it is working on a soft bullet programme on Thursday of last week (7 May), saying that new issuances are expected to take place off the new programme once it is completed this year, and Rolf-Pieter ter Horst, funding manager in NN Bank treasury, clarified that the issuer plans to cease issuing CPTs.

“Never say never,” he told The Covered Bond Report, “but the intention of NN Bank going forward is to be issuing under the new soft bullet programme and not under the CPT programme.”

The Dutch bank first entered the covered bond market with its CPT programme in October 2017 and has issued five €500m benchmarks, the last a 10 year in September 2019. In March 2019 it issued €25m and €20m 20 year private placements.

“The new covered bond programme will allow further diversification of the debt investor base,” the bank said, “and enhance flexibility with respect to bond tenors.”

Dutch peer NIBC launched the first CPT issue in October 2013, but although its example has been followed by a few compatriots and several issuers in other jurisdictions – mainly peripherals, and often for retained issuance – some sections of the traditional investor base have remained aloof from the structure.

Ter Horst said this contributed to the switch from CPTs to soft bullets – even if CPTs have served the issuer well after it made the switch from RMBS to covered bonds for secured funding three years ago.

“Covered bonds were a good step for us because it’s a broader and deeper market, and it’s more resilient in tough times,” he said. “And it offers a lot of advantages, such as cheaper funding, different maturities, and better matches the interest rate profile of our assets, i.e. 98% of the mortgage loans have a fixed coupon.

“But three years on we have come to the conclusion that CPTs are not the be all and end all of covered bonds, because the audience is still, relatively speaking, limited.”

NN Bank has experienced strong growth in mortgage lending since entering the covered bond market, and its continued growth ambitions and greater refinancing needs prompted the issuer to rethink its covered bond strategy, according to ter Horst.

“The question for us was, is CPT issuance sustainable going forward?” he said. “We have issued €2.6bn off the programme and we could easily continue with it this year, next year, and maybe even another year, but my gut feeling is that sooner or later you will reach a size where you might test the limits of the CPT market.

“I believe that the soft bullet market is more future-proof than the CPT market, and it’s my duty to have a funding strategy that best fits the bank’s needs and provides access to the market in all circumstances – that brought us to this decision.”

The European Central Bank has treated CPT covered bonds increasingly harshly in its policies – increasing haircuts in its collateral framework and excluding them from CBPP3 – and market participants have regularly cited the ECB’s stance as a deterrent for CPTs.

“Their positioning as such was not a key factor in our consideration of soft bullets,” said ter Horst, “but I cannot ignore the fact that the growth in number of investors willing to invest in CPT covered bonds hasn’t been helped by the position of the ECB.”

NN Bank’s decision to switch from a CPT to a soft bullet programme also takes into account developments in rating methodology since it entered the covered bond market, according to ter Horst.

“Three years ago, our corporate rating of A- (from S&P) meant that with a soft bullet programme we would have had zero notches of leeway with a triple-A rating and we would have required a high level of overcollateralisation, more than 20%,” he said. “Today, with our corporate rating unchanged at A-, we should have three notches of leeway with S&P and over time the overcollateralisation levels should be in line with what they were for the CPT three years ago.”